FILE PHOTO: A Canadian dollar coin, commonly known as the “Loonie”, is pictured in this illustration picture taken in Toronto January 23, 2015. REUTERS/Mark Blinch/File Photo

March 6, 2019

By Fergal Smith

TORONTO (Reuters) – Canada’s dollar will strengthen over the coming year as rising investor appetite for risk counters a slowdown in the domestic economy that could crimp interest rate hikes from the Bank of Canada, a Reuters poll of currency strategists showed.

Taken Feb. 28-March 5, the poll of over 40 currency analysts predicted the loonie would strengthen to 1.29 to the U.S. dollar in 12 months, or 77.52 U.S. cents.

That is weaker than the 1.28 forecast in February’s poll but would leave the currency up almost 3.5 percent from Tuesday’s level of 1.3349.

Although the loonie has lost some ground in recent days it has still climbed more than 2 percent since the start of the year, the second best performance, after sterling, among G10 currencies.

(World FX rates in 2019 – http://tmsnrt.rs/2egbfVh)

“The external environment has got much more supportive for the Canadian dollar,” said Mark McCormick, North American head of FX Strategy at TD Securities. “Global risk appetite is, on our metrics, the strongest it has been in years.”

Canada is running a current account deficit and exports many commodities, including oil, so its economy could benefit from an improved outlook for the global flow of capital or trade.

Optimism that the United States and China could reach a deal on trade and signals from the Federal Reserve it would be patient on raising interest rates further have helped global stocks rally since the start of the year.

Meanwhile the price of oil has rebounded more than 30 percent since plunging to an 18-month low in December.

Oil is traded in U.S. dollars, so the strengthening of the greenback since the start of 2018 could also be a boost for Canada’s economy.

“We are looking at terms of trade-driven strength, whether you are looking at things like oil prices or some of the other major commodities that form a key component of our terms of trade,” said Eric Theoret, a currency strategist at Scotiabank.

Still, a weakening of the domestic economy has prompted investors to slash bets for further interest rate hikes from the Bank of Canada. The central bank has tightened by 125 basis points since July 2017.

Canada’s economic growth slowed more than expected in the fourth quarter to a 0.4 percent annualized pace on plunging Canadian crude oil export prices, data on Friday showed.

The central bank may be closer to a policy turning point, as it is still set to hike its key interest rate once more later this year but there is now a small chance of a cut, according to economists polled by Reuters.

“The external story is good, the local story is pretty bad and the bank is leaning a bit more on the local story,” TD’s McCormick said.